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Profitability of Banks in Lebanon: Some Theoretical and Empirical Results

Author

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  • Samih Azar
  • Ali Bolbol
  • Alexandre Mouradian

Abstract

The paper, instead of relying on ad hoc measures, derives a simple theoretical model for the income of a commercial bank. This model identifies eight internal exogenous factors to the profitability of these banks. A total panel of 39 banks over the twelve-year period 2003-2014 is studied. The dependent variable is taken to be the return on average total assets (ROAA). The estimation procedure is through panel least squares. Fixed effects and random effects are considered. The results support the cross section fixed effects model, which brings to light the heterogeneity of banks in Lebanon. Four out of the eight factors are found to be statistically highly significant, explaining about 50% of the variation in ROAA. These are- the interest rate spread, the capital adequacy ratio, the cost to income ratio, and the ratio of non-interest income to total assets. Dynamics are included in the model by adding to the regressors the first lag of the dependent variable. This makes for different short run and long run impacts, with the latter found to be higher than the former as economic theory postulates. Among other recommendations banks are advised to diversify their income towards more wealth management and investment banking, to pay particular attention to their traditional source of income, which is the interest rate spread between loans and deposits, and to manage carefully their cost structure.

Suggested Citation

  • Samih Azar & Ali Bolbol & Alexandre Mouradian, 2016. "Profitability of Banks in Lebanon: Some Theoretical and Empirical Results," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 233-233, July.
    • Handle: RePEc:ibn:ijefaa:v:8:y:2016:i:7:p:233
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    References listed on IDEAS

    as
    1. Hayek, F. A., 2012. "Hayek on Hayek," University of Chicago Press Economics Books, University of Chicago Press, edition 1, number 9780226321202 edited by Kresge, Stephen & Wenar, Leif, September.
    2. Sam Hakim & Simon Neaime, 2001. "Performance and Credit Rating in Banking: A Comparative Study for Egypt and Lebanon," Working Papers 0137, Economic Research Forum, revised 12 Jun 2001.
    3. Ho, Thomas S. Y. & Saunders, Anthony, 1981. "The Determinants of Bank Interest Margins: Theory and Empirical Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 16(4), pages 581-600, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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